BreitBurn Energy Partners LP (BBEP) National Association of Publicly Traded Partnerships MLP Investor Conference Call May 23, 2013 3:00 PM ET
Jim Jackson – EVP and CFO
Mike Gaden – Robert W Baird
Mike Gaden – Robert W Baird
Good afternoon everybody. I’m Mike Gaden, a Research Analyst in Robert W Baird’s Equity Research Group. And it’s my great pleasure to introduce Jim Jackson, EVP and CFO at BreitBurn Energy Partners.
BreitBurn holds an attractive production footprint that spans from California to Florida. And the partnership has completed nine acquisitions over the last 20 months, totaling $950 million. It further targets an addition $500 million in acquisitions in 2013.
And with that, I’ll turn it over to Jim, to discuss the partnership in more detail. Thanks.
Mike, thank you for the introduction, I appreciate everyone being here. I’m Jim Jackson, I’ve been at BreitBurn since before we went public. I’m the Executive Vice President.
This week is actually the week that we celebrate the 25th Anniversary of the BreitBurn entity. And along with that we’ve had a series of commitments and events in New York and in Texas, unfortunately Hal Washburn is finishing up the last of those. So, he sends his regards. But I’m happy to be here today and present. I know this is a very important conference, lot of investors and happy to take you and everyone else through the story.
So, with that, let me have a few of the key highlights about BreitBurn Energy Partners and I’ll come back to many of these during the course of the presentation.
But first of all, we have been at this for 25 years, our strategy has been essentially unchanged since 1988 when the company was started with two wells on the Los, the Los Alamitos lease just outside of Los Angeles, where our counter is operating out of the trailer, we’ve made a lot of progress since then not surprisingly. And that is literally how the business started.
The strategies is unchanged, there is a focus on acquiring, developing and exploring long-lived oil and gas assets that are purchased and field areas where there is a considerable amount of original oil in place. We try not to dabble small fields here, small fields there, we’d rather acquire and develop around large accumulations of oil where there is a lot of long term optionality. And that was the premise on which the company was started 25 years ago and we continue to do the same thing today.
In terms of our asset base, it’s changed substantially in the last six years, but also in the last 20 years. We now have a balanced portfolio of oil and gas assets that are geographically diversified around the US, about half of our reserves are oil, half of our reserves at yearend 2012 were natural gas and we’ll talk a little bit more about that. But on a combined basis, 80% of the reserve base is proved to develop, producing reserves. And it has a 17-year reserve life.
Now, there are parts of the portfolio that are obviously higher parts, that are well but we’ll talk about why we structured it and acquired where we have acquired and how we think we put together a very attractive group of assets.
An important part of our business is acquiring. We are very selective and we are very active. We have done as was mentioned nine deals for over $1 billion in the last two years and we’re targeting more than $500 million in acquisitions in 2013. And one of the things that I’ll illustrate is that while that is a lot smaller, and acquisition target and a few of our peers, it’s no less ambitious in terms of what that allows us to do for the company and I’ll spend a few minutes on that shortly.
We are committed to distribution growth, we’ve increased distributions in each in the last 12 quarters. We’ve grown the distribution 27% since the first quarter of 2010. And we’re focused on best-in-class distribution growth among the E&P MLP we think shooting for 5% a year puts us at the top of the pack if we can do that year in and year out for the next three to five years.
And then finally we have a very conservative financial profile. We’re around 30% debt to enterprise value. And if you take a look at our peer group, we’re much more conservatively capitalized. We go to the debt and equity markets very frequently. But if you pull Wall Street Research you’ll see that the forecast for our leverage metrics in 2013 is to be just under 2.5 times levered.
That’s total debt divided by the last 12 month’s EBITDA. If you compare that to the E&P MLPs that are our size our slightly smaller but certainly larger who have issued high yield bonds for example, that group is right around 3.5 times levered. So, a full turn of additional leverage on the peer group versus BreitBurn.
So, those are really underpinnings on the starting strategy. Let me hit briefly on the asset base. I mentioned we’re in seven states around the country. What’s important to us though is that we have a significant presence in each one of those states. We now have 150 million barrels of reserves, very long reserve life. We are – we had total production in 2012 of just over 8.3 million barrels. And as I mentioned we’re 80% PDP 17-year reserve life.
The newest addition to this graph is Texas, where four of our acquisitions in 2012 were centered and we’ll spend a little bit more time on that. But the mid-continent was very active for us in 2012, and we think we’ll continue to be going forward.
And I’ve said, we’ve been running the business with a strategy that’s unchanged for 25 years, I won’t go through all this again, but I’ll say two things. We, as an asset team, we’ve been together a long time. Ours is not a roll-up strategy. We have 25 plus years in our relative disciplines across the senior management team. But we do have a scientific orientation. We try to use not necessarily the latest or the most hi-tech instruments to run our business, but we’re very focused on using the right technology to grow the business over time and we’ll talk a little bit about how we’ve done that.
We bring that together with a long history of making acquisitions successfully in our space. And tying that with conservative balance sheet, conservative or aggressive hedging depending upon what the orientation is. But we hedge very significantly and that comes together what we think is a very, very strong business.
Our goal at the end of the day is to pay and grow distributions to our unit holders and there are really four key steps in doing that. The first is have a very, very strong asset base that’s consistent with the E&P MLP model. So these are mature assets, they have proven production profiles, their development is not particularly risky, and they are in areas where there is a lot of opportunity if prices or technology otherwise changed.
Secondly, you need organic growth opportunities in the portfolio because you are in the business for the base business, it’s a little smaller every year. One of the things we accomplished in 2012 was adding organic growth opportunities to the portfolio, that’s very important for us in the event that we’re out of the capital markets or out of the acquisition market.
I mentioned, we hedged very aggressively, that helps support the distribution. And on top of that what allows us to grow it is attractive acquisitions made over the course of months and years that helps grow the base business and support distribution growth along the way.
I talked a little about growth, I won’t spend much time on this slide other than the say since 2006. Our asset base has grown five times, EBITDA has grown five times, our well count is up eight times and our relative level of liquidity is up about 10 times. So, we’ve been very effective, we’ve been very active and we built what we think is a great business and a great collection of assets.
We’ll skip ahead here to how we think about growing the business. And this is important if you’ve been following our story for some time. Think back to 2010, our business was principally natural gas, we were two thirds natural gas in terms of reserves and production. And we have very few growth opportunities inside the portfolio.
So, for a company and our business if the markets were closed, couldn’t do anything on the acquisition front, you didn’t really have a lot of running room inside the business to think about how you’re going to support and grow the business for the next two, three, four years.
We set out in 2010 to change that. We re-oriented the acquisition team on specific types of acquisitions. First, we had them focus on oil as opposed to natural gas. And secondly we wanted to buy assets that were consistent with the base business but had a little more pug component than we had in the existing portfolio.
So, since 2010, we’ve now rebalanced the portfolio, 50-50 or better than 50-50, oil and gas. And we now have about 20% of the portfolio that is low risk, development and drilling opportunities around our existing business.
To translate that, we have a couple of years worth of opportunities inside the business to grow and support the distribution, absent having to do any acquisitions. That’s a meaningful change from where we were two years ago.
I’m just going to touch on a few of the operating highlights in few of the core areas for us. I won’t talk about each state, we do have (inaudible) like this for each state that would be available on the website. But let me first touch on Wyoming. Very important business for us, we’ve been in Wyoming since 2004, we’ve made a series of acquisitions there, consistent with the business – consistent with the asset base being focused on long-lived oil and gas field. Some of these assets have been producing for over 120 years.
This is medium gravity crew, then high BTU gas, and Wyoming is a very good place to operate in terms of overall cost, lifting cost were about $12 a barrel. And again we made three acquisitions in Wyoming of which additional detail is available on, but very important business for us.
2012, we spent about $32 million in capital in Wyoming. In 2013 we’ll drill 18 wells and spend around $27 million in capital. So, very important operating area for us.
Next is Texas, we added Texas to the portfolio last year. Our assets are just north of Nederland. We entered in a very unique structure because we knew Texas was active, we’ve been looking at it for two years. But we didn’t otherwise have a presence there, we bought existing Elements, I’m sorry, existing assets from a company called Element Petroleum.
And we bought development assets in conjunction with CrownQuest, which is affiliated with both CrownQuest and LimeRock, joined together to put together something called CrownRock which we bought, which were development assets. They continue to drill those assets, we were able to leverage off of their presence in the Permian Basin. Their relationships – their folks for an extended period of time, we’ll now start to move into operations there having been able to draft our very experience for quite some time.
Very high margin business in Texas obviously. We’ll continue to look very aggressively for other acquisitions. In 2012, we only spent about $16 million in Texas. In 2013, we’ll drill 60 wells and around spread very trend and spend just under $100 million here.
Next is California. We built the business, starting in California. It is believe it or not, an excellent place to find MLP assets. I’ll talk a little bit about just many of the assets in and around Southern California has been producing for over 100 years and a lot of those are in our portfolio.
The two biggest fields we have in California are the Santa Fe Springs Field which we acquired over 10 years ago and a portion of the Belridge Field of Kern County that we acquired last year. These are very low decline, very low maintenance capital requirements assets. And at very attractive pricing while, they are high level cost, we have very attractive pricing. California oil is priced off – principally priced off at Bren, which has been a very good place to be obviously for us. And it’s a nice balance to the WTI or any other production we have on the portfolio.
2012, we spent about $47 million in California. In 2013 we’ll drill 46 wells between the Santa Fe Springs Field and the Belridge Field and spend right around $85 million.
Interesting, consisting with the MLP strategy and our low risk development strategy. In the Santa Fe Springs Field we’ll drill 20 wells this year, we drilled about 12 wells in 2012. We have only drilled four wells in the Santa Fe Springs Field in 2011.
Now we do some additional seismic work of the geology and California is obviously very challenging. We are very encouraged by the early results of drilling particularly in Santa Fe Springs. And we now think we have probably two to three years of target opportunities drilling 20 wells a year, just in the Santa Fe Springs Field which has been producing for over 100 years. So that demonstrates typical level of attractiveness and the kind of optionality we’re looking for in these assets.
With respect to additional optionality we have a big business in Michigan. We aren’t spending a lot of capital there. One asset that I would point out however is there has been a fair amount of activity recently both in the A-one carbonate and more importantly and the Utica calling with Shale in Michigan.
This graph in the lower right shows the respective productive or perspective zones for the Utica Collingwood. What’s interesting about this is it’s really not an MLP asset, we’re going to wait to see what others do and do with and say about this.
But we hold these deeper assets via production on our existing operations. So, while and much of this area could be productive, 85% of that is being held by production our existing business. So, we’ll just continue to track this and see over the next few years or few months what opportunities arise here.
As I was touching on each state, I talked a little bit about the capital program, I won’t repeat that other than to say having added some new development opportunities to the portfolio last year, the capital program this year is a total of $260 million. We’ll drill 135 gross wells across five states. And it’s focused on increasing oil production. Oil production will be up about 40% from the fourth quarter of 2012 to the fourth quarter of 2013. And that’s – that is meaningful in terms of generating additional EBITDA, additional distributable cash flow.
That being said, the bulk of the capital was being spent in the second and third quarter so we’ll really start to see the benefit of this later in the year, i.e., the second half of the year.
Let me spend a minute on the acquisition strategy, we have a very large A&D team, it is 15 people split between Los Angeles and Houston. Last year that group looked at over 500 transactions, for a company our size that’s obviously very meaningful. We were very successful in 2012, we were able to complete over $600 million in acquisitions.
I’ll point out that our goal this year is below that. So, I think we’re very comfortable ultimately with our ability to acquire. And the strategy, again remains unchanged. We’re looking for long-lived oil and gas stats where there is a significant amount of original oil in place. So, our view is we’re going to just continue to do what we’ve been doing for the last 25 years in terms of going out for acquisitions.
This is – these are the highlights of our acquisition activity in 2012, there are seven deals here in total. I won’t go through all other than to maybe to point out in that third column from the right that with between 65% oil and 100% oil, that’s indicative of what we were trying to accomplish last year, which we’re very proud of.
We had a very busy year, interestingly enough we’re – I guess we’re on track this year because we had not announced deal in the first half of last year. And we were able to accomplish all this in the second half. So, we’re obviously looking forward to the rest of the year. But this is a good example across different states, different asset bases, different kinds of transactions what we’re able to accomplish.
And our goal of $500 million in acquisitions is being implied. Here is why. For a company our size, $500 million in acquisitions for lack of a better term really moves the needle. This is a detailed illustration which I won’t take you through.
But the punch-line here is, if based on our current guidance, if we’re able to do $500 million of acquisitions that’s somewhere between 5.5 to 6 times EBITDA on a forward basis, finance it the way we would put culminant financing on the business so this is not all financed with bank debt but it’s financed on day one with a combination of equity, high yield and bank debt.
We would deliver on a full year basis about $0.21 of accretion per unit for the business. That’s about 13%, which is very, very meaningful. What’s interesting I think though is it’s also very doable. We’ve done about $500 million a year for each of the last two years and we did over $500 million in acquisitions last year just in the second half. And if you – we don’t have this data. But if you look at where the acquisitions are in the E&P space, that are relevant to us, there are a lot of transactions out there in any given year.
Under $300 million or $400 million in size, you can build a business at least, our view is for the foreseeable future, looking to transact a total of $500 million a year in deals that are $100 million, $150 million, $250 million in size, very different strategy than trying to do multi-billion dollar deals every year.
There were about 90% fewer deals, about $1 billion than there are below $500 million, if you can believe that. So, we think we’ve got a lot of running room and a demonstrate ability to deliver over the last two years.
Just touching on our financials real quick, the point of this slide is both performance and growth, 30% CAGR growth in production and 30% CAGR production in EBITDA since going public. We’d obviously love to keep that up.
We’ve done it though with a reasonably disciplined financial strategy. And I think more disciplined and conservative than our peers frankly. Our liquidity position is very good. We’re generally less than 20% drawn on our revolver, that’s currently $900 million facility, we’re less than $150 million drawn today. We’re focused on running the business with lower leverage than our peer group is running their business today. We’d like to keep that below three times levered.
We underwrite every acquisition assuming we do, we refinance it with 50% equity and a combination of long-term debt and short-term debt going forward. And we hedge very aggressively.
One thing we’ve done in the last six months is taken up our target hedging percentages meaningfully. We’re now 80% hedged in year one, 75% hedged in year two, 70% hedged in year three and we’re targeting 60% and 50% hedged in years four and five and we’re getting there with respect to years four and five. In addition, acquisitions, we hedge as aggressively as we can. So we may even hedge acquisitions more aggressively than this.
And then finally, just the target distribution coverage ratio is 1.1 to 1.2 times because of the expansion of the capital program and the ramp up in our level of activity, we expect to be below that. In the second quarter, we were below that than the first quarter. But we’ll exit the year at or around these coverage ratios, excluding any acquisitions we might do. And acquisitions would only be additive to that.
I mentioned we have significant financial flexibility, I won’t go through all the detail here but the punch line is between equity and long-term debt. We’ve raised over $1 billion since the end of 2011. So, we are a – we’re very acquisitive and we’ll be a frequent issuer along those lines.
All of the supports distribution growth, you can see since the first quarter of 2012, we’ve increased distributions from 37.5 cents in the first quarter to our current rate which is right around 47.5 cents. We don’t have IDRs, so that allows us to be more effective in terms of cost to capital.
Our tax yield is very similar to our peers. And we’re supporting this level of acquisition – we’re supporting this level of distribution growth again with the base business, with very achievable results in terms of acquisitions and a very conservative financial profile.
Now, I mentioned hedging, I’d like to spend just a minute more on that because it was a challenge for us moving from 2012 to 2013 with our hedge broke into time because we had very attractive hedges in 2012 that were left over frankly from some transactions we did in 2008. All of those headwinds if you will are largely behind us.
We show here the total amount of current production hedged in future years and you can see we’re right on target or generally right on target with respect to our percentages although we need to work on the out years. But more importantly, our average oil hedge price is reasonably flat for the next four years. We have a little bit of degradation in hedge price in terms of cash, going from 2013 to 2014, but after that it’s reasonably flat and gas is of decreasing importance to us obviously in terms of profitability as we grow.
So, very, very complete hedge book. Some of our peers talk about being hedged 100%, we’re not there, we will get there because it’s expensive. To be a 100% hedged, you either have to take a lot of risk that your cost go up and you’re not able to cover them or you have to go out and buy instruments to get your 100% hedged that are very expensive, certainly very expensive to throw on and very expensive to replace over time.
Just two quick snapshots in terms of how we build our hedge book. It’s hard to say, we can make it much more simple. We are generally hedged using swaps, we hedge with all the counterparties that are in our credit facility and there really is nothing esoteric built into our hedge book other than on the oil side we do hedge book WTI and brunt because a significant portion of our overall oil production is tied to brunt based pricing.
Natural gas, even more boring in terms of how we approach it, more than 95% swaps, very little going on in the hedge book in natural gas, not likely to add meaningfully to disposition over time because we’re – we’ll see a natural degradation in our gas production, spending very little capital on gas. And we’re more focused on oil acquisitions now than we are a gas acquisition.
About hedging works. From the peak to the trough of 2008 to 2009 we saw commodity prices go down by about 75% of our overall profitability measured by EBITDA here was down right around 20%. So, it’s a strategy that works for us. We were – we have been hedging very aggressively for 25 years, we will keep doing it. It helps support distributions and distribution growth ultimately.
And then finally, we think we’re a very good value right now. There has been a fair amount of movement within the peer group in terms of overall valuations. We’re trading just under 10% yield. We’re obviously inclined to think that that’s too high. There is certainly room between us and other parts of the peer group that are trading 100 or 150 basis points lower. We will ultimately get there. But the consensus view is that there is a – there are attractive returns to be made as we move towards to median yield among the peer group going down from right around 10% where we are today.
And we think as we continue to demonstrate that we can acquire, we can continue to demonstrate that we’re increasing the hedge book. And we work through some of the headwinds that we have in 2012 and ’13 with our commodity price production portfolio, we will get there.
So, just to sum up, I’d say, we’re responsible and experienced management team. We’ve been doing this now either separately or together for almost 25 years. We built a very attractive business and base of assets that are consistent with the MLP model.
We are now headed for our 13th quarter where I suspect we’ll recommend yet another distribution increase even without an acquisition. Our targets for acquisitions are below what we’ve been able to accomplish in the last two years, I think those are very achievable.
We’ve materially increased the scope of the hedge book in the last four or five months which we think people are starting to appreciate. And then finally, we’re in fact, we’re very attractively priced for a business that’s this big, that is balanced in terms of oil production and gas production and is diverse geographically.
So, with that, I’m not sure how we’re doing on time. I’m happy to take one question here if there is time. And then we’ll head to the breakout room.
Mike Gaden – Robert W Baird
Based on history and your plans for further capital investment, this 10% yields should grow at what annual rate over the next three to five years?
Well, hopefully the 10% yield goes down actually. But what the metrics from our perspective that that we can control and that we’re focused on is how do we drive distribution growth. And from our perspective we think 5% targeted distribution growth per year in our business over time is going to be best in class performance.
So, we’ve demonstrated that historically, our goals are very achievable in our view and they are consistent with past practice. We’re fortunate to have a lot of issues from 2008, 2009 behind us. So, our goal is to get our distribution growth rate up and that yield percentage down.
Okay. Everyone, thank you very much, for attending today. I appreciate the opportunity to any of your questions. Thanks again.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!